My presentation today will focus on the last two sections of your analysis—the nation-wide impacts of the oil and gas industry. I will focus on the oil sands and explore three issues: oil sands growth, the key risks to that growth, and who will capture the value from the sector.

How large will the oil sands sector grow? Industry forecasts currently project growth from today’s levels of two million barrels per day to over three times that amount within the next two decades. These forecasts are, however, underpinned by what are likely to be unrealistic production cost assumptions.

Imperial Oil’s Kearl project, which came online last year, originally applied for regulatory approval citing a total project budget of $5.5 billion for a 345,000 barrel per day project—a project cost of a little less than $16,000 per barrel per day of production capacity. The first phase of the Kearl project, with production capacity of 110,000 barrels per day, was brought on line with a total investment of over $12 billion. They spent more than twice what they expected to spend and got less than a third of what they expected in the end.

On the operating cost side, we can look at Suncor. In 2003, Suncor set a goal to reduce oil sands operating costs below $10 per barrel, and delivered a cost of $11.50—a sign of things to come. Costs have increased dramatically and, in their last quarterly report, Suncor saw operating costs of $36 per barrel.

In research currently underway with my colleague, Branko Boskovic at the University of Alberta, we look at this issue. First, we’ve examined how exposed oil sands projects are to carbon prices affecting only production emissions—the answer is not much. For a new, in situ facility, and assuming that oil prices remain at US$90/barrel, a prototypical project would likely continue to meet typical investment benchmarks of a 12-13% rate of return even at carbon prices of well over $100/tonne, or equivalently with regulatory requirements for carbon capture and storage. The same is true for mining operations—while they tend to have lower rates of return initially, they are also lower emissions, and so are less exposed to increased costs associated with climate change policies.

The second question we asked was whether oil sands projects would remain viable in a low-carbon scenario—the same question asked by ExxonMobil. We used the International Energy Agency’s low carbon scenario, and assumed aggressive domestic carbon pricing policies, and compared these to typical assumptions used by industry today. Under the IEA low carbon scenario, oil prices remain sufficiently robust (over $100 per barrel in today’s dollars) to generate returns to oil sands investments significantly above typical investment hurdle rates. This leaves us with two questions—first, why does the International Energy Agency find such limited oil sands growth (see their 2010 report, which see oil sands development capped at 3 million barrels per day) and, second, why are Canadians generally told, at least implicitly, that they must choose between oil sands development and global action on climate change?

The third element which has been raised at length in your hearings to date, and which I would like to address, is the question of value-added. Let me assure you, the term is in italics in my notes. I would like to remind you that, as many of your previous witness have noted, most of Canada’s hydrocarbon reserves are not crude oil, they are bitumen. It is often said that Canada should act to, “encourage more value-added processing of this bitumen.” I’d like to concentrate on two words in that statement: encourage and processing. That we should want more value-added is self-evident, as long as it’s a true measure of value-added including all costs. But more processing, especially when encouraged by governments, may significantly detract from value. To understand the difference, consider how governments might encourage more processing of bitumen in Canada—either through direct government involvement, as with the Northwest Upgrader project in Alberta, or through indirect involvement such as export bans, taxes, or other fiscal or trade policies. Governments would either be taking on risk and/or costs or indirectly creating larger market discounts for bitumen in order to encourage more processing. That’s not value-added—it’s devoting valuable resources to encourage processing. It’s a subtle difference, but one which matters a great deal. We must recognize that, rather than taking jobs from Canadians, foreign refining capacity which can, cost-effectively, transform bitumen in to higher value products has a very important implication for Canada—it increases the implied value of bitumen, which is, after all, what we should want as owners.

Please tune-in to the committee hearing and listen for the questions which will hopefully follow from this statement. I’ll do my best to answer any of your questions in the comment thread below.

“We must recognize that, rather than taking jobs from Canadians, foreign refining capacity which can, cost-effectively, transform bitumen in to higher value products has a very important implication for Canada—it increases the implied value of bitumen, which is, after all, what we should want as owners.”

C’mon Andrew you can’t just present one side of the equasion and just say it’s balanced. There’s the extra risk factor to transporting dibilt over long distances past vulnerable water ways. Sure the risk is less over land than via tanker[ the principle reason why NGP will ultimately fail] What i’d like to know is at what point should govt try to mitigate these risks, essentially by not allowing bitumen to be piped any significant distance? upgraded and piped as a refined product there is likely to be significantly more by in and less opposition to granting social license. What would that kind of trade off cost us in real terms, and why shouldn’t the tp assume some more of that risk? It isn’t as if no one will buy our upgraded product. Why do you posit …”Governments would either be taking on risk and/or costs or indirectly creating larger market discounts for bitumen in order to encourage more processing.”
Basically you’re making just the case for not fettering the slice of profits industry and govt takes from this public resource…almost a laissez faire argument, without costing in the environmental and social costs, which are significant. Your “discount” is actually the point environmentalists are trying to make, not beside it. In your argument it is “others” who must bear the lion’s share of the environmental risks, not the producer or the investor.

How is it less environmentally risky to build an east pipeline to the Irving refinery or to Quebec to process the bitumen than it would be to pipe the bitumen out of the country? Either way, you are piping the bitumen a long distance are you not? If I am understand Mr. Leach correctly, all he is saying is that the governments of our country will have to invest a lot funds in building or altering refineries and then will have to offer the bitumen at a bigger ‘deal’ in Canada to get it processed. In the end it might not be a good deal for the country in terms of dollars and cents. On the hand, will it provide jobs for those unemployed in other provinces outside of Alberta? Perhaps but is the trade off adequate?

The argument absolutely extends to low cost domestic refiners. If Energy East increases the value of bitumen, that’s a positive., If, at the same time, it still aloows higher margins for eastern refinery assets, that’s good too – in fact, that’s exactly what we should look at when we talk about pipelines, not the jobs associated with building them.

No, that’s not at all what I am saying. I am saying that having foreign bidders willing to pay more for bitumen because it is worth more to them increases the value of our natural resource. That is entirely separate from the questions of whether it can be transported safely, under what regulations it should be transported, etc. If you want to make a safety argument, that’s great – don’t make a proxy argument in protectionist terms. My discount is not an environmental risk discount – the same thing would apply if we restricted the export of wheat. Canadian wheat would be discounted, farmers would be hurt, and domestic procesors would do well.

Perhaps I am wrong but hasn’t this issue with Russia taught us that we would be wise to secure an independent oil supply in Canada. Shouldn’t we ensure that we aren’t dependent on other nations to supply us with processed crude when we have just learned a lesson that the supply can be unstable? Perhaps the trade-off makes it worth it. Also, we please environmentalists who for some reason are okay with piping bitumen across the whole of Canada but not across BC.

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